Currencies Don't Make Gold Look Good

Let's start by stating that the title of this essay refers to the current
situation on the gold market - not to the long-term fundamental picture. In
fact, up to this day, no paper currency has survived in its original form while
gold has been used as money since time immemorial. Every fiat currency since
Roman times has ended in devaluation and eventual collapse, of not only the
currency, but often of the host economy. The usual course of events is that
paper currencies are inflated away until worthless. The purchasing power of
the US dollar, for example, has declined by 90% since 1950, also true for most
currencies.

The Roman Denarius was a coin of pure silver at the beginning of the first
century C.E. Hundred years later the denarius' silver content was down to 85%.
Roman emperors liked the idea of devaluing their currency in order to pay the
bills and by 218 C.E. the Denarius was down to 43% silver. Around the time
of the collapse of the Romans Empire, the Denarius contained only 0.02% silver
and was no longer universally accepted as a medium of exchange or a store of
value.

There are numerous other examples of failed experiences in fiat money, the "Flying
Money" of China, The Livres and Assignats of France. The German Mark under
the Weimar republic deserves special mention, since this period influences
Germany's thinking today. Post-World War I Weimar Germany is infamous as an
example of the greatest hyperinflation ever. The Treaty of Versailles that
ended World War I punished Germany by forcing it to make reparations. The only
way Germany could meet its obligations was by running the printing press. Inflation
got so bad that Germans were using stacks of Marks to heat their furnaces and
used wagonloads to buy bread. In 1919, 12 German marks equaled one U.S. dollar.
By 1923 the rate was 4.2 trillion marks for one U.S. dollar. In more recent
history we have had currency shocks in Argentina, Finland, Italy, Norway Mexico,
Thailand, Russia, Turkey and there are many more examples.

So what's in the future for the dollar?

History teaches us that when governments come under financial pressure they
can never resist printing money to pay for debts, be it for wars or excessive
spending. Gold is the only currency which has no liability attached to it,
nor can it be printed, counterfeited or reproduced (well, silver and platinum
are exceptions here). Among its many stellar qualities is the fact that it
cannot be destroyed by fire, water or time. Gold doesn't expire, it is mobile,
divisible and internationally accepted for the last few thousands of years.

Over time gold has represented an excellent investment that holds it value
in real terms. In particular, gold appreciates during periods of high inflation
and financial instability. As there is limited supply of gold it cannot be
printed to finance government deficit spending. Gold can act as a critical
hedge both against inflation and a deflationary financial collapse.

Precious metals are in a secular bull market and are likely to move much
higher eventually, but there's a huge difference between "eventually" and "now" and
a decline may be seen first.

So, let's begin this week's technical part with the analysis of gold itself.
(charts courtesy by http://stockcharts.com.)

In the very long-term gold chart (if you are reading this essay on sunshineprofits.com,
you may click the above chart to enlarge), not many changes were seen last
week although we do see RSI levels suggesting the situation is similar to 2008.
Indications are that a significant decline is underway right now, and it's
likely that the period ahead will be quite volatile.

We expect volatility, especially if gold's price moves below the $1,500 level.
This would be an important development, because it would surpass the two recent
local bottoms and the psychological round number of $1,500. Many would likely
run for the hills causing the decline to accelerate.

Now, let's have a look at gold from a non-USD perspective.

In this chart, we see no significant changes. Price levels remain between
the rising resistance and declining support lines as has been the case for
a number of weeks now. The recent sideways trading patterns continue to have
mixed implications.

To complete the currency-based gold analysis, let's have a look at gold-to-Japanese
yen ratio which really is the price of gold seen from the perspective of those
who use yen to pay their bills..

Looking at gold from the Japanese yen perspective, it appears that the breakdown
below the red support line has been verified, and this line will now provide
resistance to any turnaround in prices here. The medium-term trend is to the
downside, and the outlook remains bearish here.

To finish off, let's see take a look at precious metals correlations.

The Correlation Matrix is a tool, which we have developed to analyze
the impact of the currency markets and the general stock market upon the precious
metals sector. Last week, the short-term correlations appeared rather weak.
Metals did not respond immediately to all the signals from the currency and
general stock markets and price moves generally were somewhat erratic.

The medium-term coefficients of the precious metals last week held pretty
much true to form as they were negative with the USD Index and positive with
the general stock market. The currency markets continued to be more important
at this time as has been the case for the past month or so. This is true although
not really visible on a day-to-day basis. So let us stress a thing that we
mentioned many times in the last
couple of weeks: significant moves to the upside in the USD Index
are likely to be devastating to precious metals prices.

Summing up, the short-term outlook for gold is not bullish. As for
correlations, currencies currently seem to be the most influential factors
responsible for gold and other precious metals recent moves, and every precious
metals investor should watch these markets carefully. There will be time to
get back on the golden boat and it might come soon if signals from the above
charts are invalidated. This is definitely not a good time to stop paying attention
to the developments on the precious metals market.

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Przemyslaw Radomski, CFA (PR) is a precious metals investor and analyst who
takes advantage of the emotionality on the markets, and invites you to do
the same.

His company, Sunshine Profits, publishes analytical software that anyone can
use in order to get an accurate and unbiased view on the current situation.

Recognizing that predicting market behavior with 100% accuracy is a problem
that may never be solved, PR has changed the world of trading and investing
by enabling individuals to get easy access to the level of analysis that
was once available only to institutions.

High quality and profitability of analytical tools available at www.SunshineProfits.com are
results of time, thorough research and testing on PR's own capital.

PR believes that the greatest potential is currently in the precious metals
sector. For that reason it is his main point of interest to help you make
the most of that potential.

As a CFA charterholder, Przemyslaw Radomski shares the highest standards for
professional excellence and ethics for the ultimate benefit of society.

Disclaimer: All essays, research and information found above represent
analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates
only. As such, it may prove wrong and be a subject to change without notice.
Opinions and analyses were based on data available to authors of respective
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Radomski, CFA and his associates do not guarantee the accuracy or thoroughness
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